Do poverty programs reduce poverty?

By Scott Sumner

The answer is “probably”, but by less than you might assume. The LA Times has an interesting article entitled:

New evidence shows that our anti-poverty programs, especially Social Security, work well

I’m not quite convinced by this argument. The article discusses some very interesting research by Bruce D. Meyer and Derek Wu, which shows the poverty rate looking at only official income data, and then again after accounting for taxes and various income support programs. I’m convinced by their argument that poverty, properly measured, has fallen rather sharply over time. There are clearly far fewer poor people in America than when I was young (in 1960).

Indeed research by Bruce Meyer and James Sullivan produced another similar graph that I included in this post, which shows that the consumption poverty rate has fallen to extremely low levels, below 5%. I like that graph so much I included it in the new principles textbook that I am working on.

And yet, none of this tells us about the causal impact of poverty programs. The first time I ever spoke up in a college econ class (back in 1974), was to challenge my professor on exactly this point. He showed data on the income distribution before and after transfers, and argued that this showed the impact of transfers. I raised my hand and suggested that without transfers, low-income people would probably have more market income. (He graciously conceded the point.)

For instance, if there were no Social Security program, older people would be more likely to keep working beyond age 65. Having said that, I would also like to make the following two points:

1. Even if Social Security does not raise the income of the elderly, it quite likely makes them better off. Many old people would prefer to spend their final years enjoying life, not working at Walmart, or at least working less than full time.

2. I do think it likely that Social Security did reduce poverty, as the offset of fewer hours worked and less market income is likely less than 100%.

When you look at poverty programs for the non-elderly, things get a bit murkier. It is certainly plausible that they have also reduced poverty, but it’s hard to prove. While poverty has declined sharply since the 1950s, it’s important to keep in mind several factors:

1. Much of the fall in the official poverty rate occurred prior to 1966, before the Great Society programs were fully implemented.

2. Even without poverty programs, you would have expected a sharp fall in poverty because of economic growth. Per capita GDP is much higher than in the 1950s.

Consider a family of illegal immigrants from Latin America, where both the husband and wife work full time. What is the poverty rate among that sort of family? I suspect it’s pretty low. And yet that family does not qualify for government income transfers.

So here’s the $64,000 question. To what extent have poverty programs caused different labor market behavior among America’s native-born poor, as compared to that hypothetical immigrant family? I don’t know. How many single moms who are on welfare would instead be married and working as hotel maids if welfare was not currently available? I don’t know. What if welfare had never been available over the past 50 years? I don’t know, and I don’t even know of any way to find out. We should be very modest about our ability to answer these sorts of questions.

PS. Can anyone find annual data on the poverty rate going back to WWII? I know it’s out there, but Google can’t find it.

READER COMMENTS

Jason Wall

Jun 19 2018 at 12:51pm

Todd Kreider

Jun 19 2018 at 1:01pm

Try Google Books. I had looked this up a month ago since Thomas Sowell wasn’t correct on this in a recent interview and now found this in Poverty in the United States: An Encyclopedic History of Politics… Vol. 1:

Jun 19 2018 at 1:20pm

JFA

Jun 19 2018 at 1:46pm

There is a strange thing about that graph. The poverty rate after taxes is the same as the poverty rate after taxes plus non-cash benefits. That’s a bit odd, no? It suggests that the in-kind anti-poverty programs don’t really do much of anything.

Henri Hein

Jun 19 2018 at 2:02pm

I am not convinced about Social Security. To be sure, some people are better off with an enforced retirement program. Thinking about the counterfactual of no Social Security, I assume some people would spend the extra 13% income on present consumption, and some people would save at least a portion of it. I recently calculated that someone making $20,000 annually for the 40 years leading up to 2016, if she saved 7% of her income and got a 4% return on her investments, her retirement savings would match her Social Security benefits for 20 years. I think it is realistic to assume some people would save more than 7%, and some people would get more than 4% growth. My guess is the group outperforming Social Security would be sizeable, but I don’t know enough to substantiate it.

nobody.really

Jun 19 2018 at 11:08pm

I have difficulty analyzing the effects of Social Security.

First, realize that Social Security revenues have basically financed government for most of our lives. Thus, if we hadn’t had Social Security, we would have had higher income taxes. Presumably those would have been more progressive than FICA taxes, but since Social Security benefits (including disability payments) tend to be progressive, it’s hard to gauge the net effect. In any event, to conduct an apples-to-apples analysis, we’d need to compare the returns you get on FICA taxes to the returns you get from other forms of taxes. That should put things in a different perspective.

Second, I have difficulty evaluating the risk of a Social Security default compared to the risk of other types of investments. Without being able to identify comparable risks, it’s hard to know what returns we should expect.

Third, arguably the principle beneficiaries of your Social Security benefits is … me, and other third parties. Members of the public hate to see poverty. Social Security arguably reduces the number of people living in abject poverty, even if it also might reduce average wealth. In other words, Social Security is a government program designed to achieve a SOCIAL benefit. The fact that you may also derive a PERSONAL benefit is nice, but not really the point, so the argument that the program seems sub-optimal as a vehicle for promoting your PERSONAL benefit is irrelevant.

Scott Sumner

Jun 19 2018 at 8:24pm

Thanks Todd and Jason, That’s helpful. It seems that the official poverty rate declined until the late 1960s, and then leveled off. The actual poverty rate probably declined further, but it’s not clear how much of a role the “War on Poverty ” played in the more recent decline.

BC

Jun 20 2018 at 9:16am

The counterfactual to Social Security includes not only more seniors working and more people saving during their working life but also more working adults supporting their retired parents. After all, that’s what happened before Social Security, and Social Security benefits come from taxing those same adults (along with working adults that do not have retired parents living in the US). The difference is that Social Security socializes parental support instead of allowing working adults to support their own parents. The counterfactual could also include people having more children and, thus, a higher ratio between working age population and retired seniors.

One could also ask whether Social Security is better at alleviating seniors’ poverty than a welfare program specifically targeted at poor seniors. Social Security is essentially UBI for seniors. Many people believe that UBI for non-seniors would be too expensive compared to targeted, means-tested welfare even if means testing produces some disincentive effects. Perhaps, similar analyses applies to UBI for seniors. One could also imagine means-tested Social Security, where the means testing includes not just the senior’s income and wealth but also the income of that senior’s adult children. That would provide incentive for workers to save so as to not burden their own children in the future.

nobody.really

Jun 20 2018 at 12:02pm

I’m convinced by their argument that poverty, properly measured, has fallen rather sharply over time.

This begs the question, what does “properly measured” mean? Specifically, what do we want to measure when we measure poverty—and, more relevantly, poverty programs?

[N]one of this tells us about the causal impact of poverty programs. The first time I ever spoke up in a college econ class (back in 1974), was to challenge my professor on exactly this point. He showed data on the income distribution before and after transfers, and argued that this showed the impact of transfers. I raised my hand and suggested that without transfers, low-income people would probably have more market income.

Almost certainly true. But why should we focus on market income? If I presented evidence that, in the absence of poverty programs, more women would sell their babies and engage in prostitution, would we praise this as a mechanism for promoting market income?

How many single moms who are on welfare would instead be married and working as hotel maids if welfare was not currently available?

In the past, the economic institution of marriage was arguably stronger and divorce was less common. That is, people were largely trapped in the institution, with all the good and bad that entailed: Less divorce, but more domestic homicide and abandonment. Spouses endured all kinds of abuse for lack of an escape route. Does the fact that those consequences may be difficult to measure via market income render them irrelevant to policy analysis?

By the same token, how many women would enter the labor force and work as hotel maids if only we didn’t have the institution of marriage?

Conversely, studies of guaranteed minimum income revealed that recipients (especially women) reduced their paid labor force participation—and instead spent more time caring for children and parents, going to medical appointments and parent/teacher conferences, etc.

All these examples illustrate the problem of focusing on market income promotion as the sole measure of a policy. In short, our economy is awash in socially-desirable behavior that gets measured poorly, or not at all, via the labor market. The fact that many domestic services (“women’s work”) do not command a salary does not render them valueless.

Of course, criticizing the focus on market income is the easy part of the argument. The harder part is identifying a BETTER measure….

[I]f there were no Social Security program, older people would be more likely to keep working beyond age 65.

Again, almost certainly true. And given current labor force participation rates, an older person remaining in the workforce longer likely would result in some other (younger?) person NOT entering the labor force, or having fewer hours. In short, it might simply shift the poverty from the old to the young. (Ironically, prior to Social Security, the elderly were the segment of society most likely to be poor; afterwards, they became the segment least likely to be poor. Go figure….)

Even without poverty programs, you would have expected a sharp fall in poverty because of economic growth. Per capita GDP is much higher than in the 1950s.

Perhaps. Depends on what we measure when we measure poverty.

Here’s a classic dynamic we encounter when studying “the poor.” Generally poverty refers to some segment of society with low income—that is, an outlier. Measures of averages, such as “per capital GDP,” provide weak indications about outliers. So there’s no inconsistency in observing that some average has increased, yet outliers have ALSO increased, provided that incidences around the average have declined. So, have we observed the hollowing-out of the middle class—say, the elimination of middle-management and union jobs, but the rise of both highly-compensate jobs and unstable, benefits-less gig-economy jobs?

That being said: I’m guessing that, in fact, today’s “poor” enjoy more consumer goods and services than the poor of any prior generation. Heck, many poor people have internet access, which puts at their fingertips a wealth of resources that was unavailable to the kings of even a generation ago. Today’s 20-yr-olds have access to more porn than the 20-yr-old Hugh Hefner ever imagined possible.

But today there are also more things to spend money on—and THAT fact influences our concept of poverty.

If both your son and President Coolidge’s son die of staph infection, disparities in wealth don’t seem so significant; you can see that we’re all in the same boat, even if some people’s seats are nicer than others. But today, access to resources is a big driver of health outcomes. For example, US life expectancy for 64-yr-olds is LESS than for 65-yr-olds. Why? Who knows, but the fact that people get access to Medicare at 65 would seem to be a pretty likely contributor. And in this environment, disparities between the lifestyle of today’s rich and today’s poor seem more significant—even if we acknowledge the improvements between the lifestyle of today’s poor and yesterday’s poor.

Arguably this concern for disparities is itself a manifestation of wealth. That is, the wealthy can demand more of everything—including compassion. It is because we are so wealthy that we have the luxury of worrying about wealth disparities.

Jun 20 2018 at 12:36pm

Also though most people seem to prefer to live separate from their adult children, absent Social Security more might live with their children and therefore not be considered part of a poor household as currently measured.

Scott Sumner

Jun 20 2018 at 8:10pm

nobody.really, You said:

“If I presented evidence that, in the absence of poverty programs, more women would sell their babies and engage in prostitution, would we praise this as a mechanism for promoting market income?”

I’m not sure how this relates to this post, which was not about “praising” any sort of policy.

nobody.really

Jun 20 2018 at 10:39pm

Fair enough. Yet the point remains: In evaluating policy, it’s hard to know what it is that we should be optimizing. Clearly, market income ain’t it.

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